Small Cap Value Report (Fri 6 Dec 2019) - DUKE, HYNS, NAR

6th Dec '19 by Graham Neary

16 comments 6046 reads

Good morning!

I'll start today's report with Duke Royalty (LON:DUKE) and Haynes Publishing (LON:HYNS). and then will see where to go from there.

Duke Royalty (LON:DUKE)

Share price: 48p (+0.7%)
No. of shares: 240 million
Market cap: £115 million

Interim Results

Many of you will be familiar with this one: it provides investments to private companies in the form of royalties.

We can think of it as a type of corporate mortgage: the investee pays flat payments to Duke over a very long period of time (e.g. 30 years). There is no final maturity date on which the principal is paid back - the principal is considered to be paid back over the course of the agreement.

Except there is one major difference, namely, that the payments aren't flat. They increase or decrease (subject to a floor and a cap) in line with revenue changes at the investee.

It's a bit like if the bank increased your mortgage payments by 5%, whenever your income increased by 5% (or reduced them if your income declined).

It's an innovative structure, and I was a shareholder here for a while (not currently).

These interim results appear to be in line with expectations. In terms of net income, the company earned £3.3 million, versus forecasts in the market for full-year net income of £6.9 million.

EPS is 1.65p, versus full-year forecasts for 3.3p.

The Chairman would like people to focus on "net cash inflow from operating activities", a simple measure of cash generation. By this measure, Duke generated cash of £3.9 million. This consists of:

£4.4 million received in royalty payments
£600k in interest received
£1.1 million in operating expenses paid

Some quibbles

I have a few minor qualms about this, which would make me want to focus on the income statement more than cash flow.

Firstly, Duke's payments to its suppliers, i.e. operating expenses paid, don't happen exactly in line with when these costs are incurred.

For example: in FY 2019, Duke incurred operating expenses of £1.845 million. In H1 2020 (the period reported today), these were £1.255 million. From the income statement:

But Duke didn't pay these amounts in cash to its suppliers, as you can see on the cash flow statement. It…

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MrContrarian

6th Dec '19

My morning smallcap tweet:

Haynes Publishing (LON:HYNS) Mobile Streams (LON:MOS)

Haynes Publishing (HYNS) guides H1 adj pretax up 37%, cf FY f/c up 39%. Should support the formal sale.
Mobile Streams (MOS) CEO resigns (he sold his shares this week) but stays as an employee in the role of non-board VP Business Operations. Only 2 weeks ago, after a rescue placing, he said "the Company can now move forward with the exciting developments it has identified in what we hope is a new chapter as a public company."

Nothingventured

Numbers look good - I do wonder what would happen in a recession tho'.

"I am pleased to report the results for the Group for the six-month period ended 30 September 2019 ("Interim 2020"). Interim 2020 was a period of ongoing rapid development for the Company with revenue, profitability and cashflow all increasing materially year on year, as well as further deployment of capital into its royalty portfolio. The Group also strengthened its operational team."

Jim

STOCKWATCH UK

DUKE....reads ok, £5.9m income, PBT £3.7m. R emember, raised £17.5m @ 44p in October (and the shares slumped to 42p before the pre 1H rally!) Divi upped in Q2 to 0.75p so 2.95p FYe? Interesting that opps team now at 'sustainable level' giving 'operational leverage'. No colour on the 12 partner investments. New LTIP awards and less director fee info than last time! Have Neil on the phone in an hour.

Zipmanpeter

Graham,

On a quiet, wet Friday 1 week before the UK election, a moment for some wider thoughts?

Is the GE material or just a sideshow for the UK stockmarket on a 6month and 5 year basis?

DWit199

James Halstead (LON:JHD)

In the AGM statement and trading update today, they state

I have been completely unaware of this as an issue. Will other companies be affected?

FREng

Peter

There's a Ben Hobson disuussion on this topic.

rmillaree

"Our cash balances remain robust although the new rules on accelerated quarterly UK corporation tax payments, with six instalments in the financial year, will mean a one-time effect of some £4 million."
I have been completely unaware of this as an issue. Will other companies be affected?

I wasn't aware of this either - the links i have looked at suggest for profit over 20 mill per year new rules are that the four on account payments are earlier than were made previously - there didn't seem to be specific mention of 6 payments though - perhaps that includes balancing adjustments ??

IF my calcs are correct based on what i looked at then previously/smaller companies pay.0% of corp tax at half year end and 50% of corporation tax at full year end.

Larger companies now pay 50% at half year and 100% at full year.

So its a swap from being 6 months o/s to nothing o/s at year end and half year end - Halstead had 10.4 (5.2 mill hit estimated based on above maths) mill tax per latest accounts so numbers don't match exactly but figures will always be estimated in year and i am probably missing something.

When they say one-time effect - it is actually a permanent ongoing situation where such large companies will have less cash at bank than they would have had (if we presume they pay in full on time). Practicably speaking though the reduced cash will have a matching lower current liabilities payable - i am guessing most companies window dress their year end balances somewhat anyway so perhaps this forced adjustment will make such window dressing slightly less severe than it would have been all other things being equal.

Old ManFit

CT installment payments was introduced in 2017 and active for APs after April 2019 for "large" and "very large" Co.s.

Most profitable PLC's will be affected but it should be manageable, though it can take a couple of years to adapt cash and treasury management for the outflows - I am expecting to see reference to CT installments in ARs for the next 18 months.

andrea34

While the new revolving credit facility is on improved terms, an "interest rate equal to one-month LIBOR plus 7.25% per annum" still seems ridiculous considering where rates are at the moment. Maybe this is indicative of the risk profile...

Duke Royalty (LON:DUKE) .....Post interim results conversation with the CEO and FD.

£115m mkt cap. October raise of £17m at 44p.

CEO happy with life, operational cash flow up 200% pleased him. 2020 will see a focus on extending stock coverage with brokers and has three already. Operational leverage will be evident in 2020 as full team in place (8) to handle deals. New financial terms agreed earlier in the year. Asset diversification important and an 'around about 3p ' for a FY dividend. The hopper is filling and all deals will 'be accretive'. More in the members note.

Graham Neary

Hi Jim

"what would happen in a recession" - a great question that should be applied to ALL companies! And it is a relevant question for Duke Royalty (LON:DUKE).

Best

Graham

TamzinPiworld

Some new videos today published today by piworld:

Sosandar (LON:SOS) the full results presentation, given by management last week during the results roadshow. They are very enthusiastic how it is going, with a record revenue in November. Through, increased investment in product, staff and marketing, including TV advertising. Here's the presentation by Co-Founder & CEO, and Head of finance.

For weekend watching, the second part of The Market Maker: what do market makers do? Insights from an ex Director of Marketing Making at Winterfloods. Part 2 builds on part 1, with more insights into how market makers set the price. We learn more about dark pools, tree shakes and much more. And yes, market makers can and do, get it wrong!

Here again, is The Market Maker - Part 1, in case you missed it last week. Discussing risk management, setting a price, the spread, and much more.

Happy watching!

davidjhill

Graham

That is a superb piece on Duke Royalty (LON:DUKE) well done. I have a small long position and whilst I am happy to leave that on for now your piece gives a really interesting perspective that I'm not sure I had properly calibrated into my investment thesis. Thanks

john652

I find Haynes Publishing (LON:HYNS) perplexing. It was on my watch list that I didn’t get round too, price went up a lot, too much for me, but it has a lot going for it, big back catalogue, IP, digital strategy..... then puts itself up for sale, with little market reaction. I partly think it has a lot of potential as a short term position with a tight stop, upside bid optionality but I don’t know. Something seems quite odd with this situation.

john2

I tried to buy £5000 worth of Haynes shares a few weeks ago, but HL told me they couldn't supply that many shares.

Clementwether

9th Dec '19

In relation to Northamber (LON:NAR) I believe that trading losses can only be carried forward against future profits of the same trade, so if that's what the 4.7m is then I don't think it could be used to cover a future capital gain.

Small Cap Value Report (Fri 6 Dec 2019) - DUKE, HYNS, NAR

Duke Royalty (LON:DUKE)

Some quibbles

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Graham Neary

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